Assignment ME

Q2. Normal price is the price specified by the manufacturers for sell.Market price is the price at which the

product is sold in the market.The market price may be more or less than the normal price depending on the

demand n supply of the product. Answered by Damodar Biswal, 19 Feb '10 04:18 pm

Normal price is based on product cost and reasonable profit but market price is determined on at what

price product can be sold taking in to consideration the demand and supply

Market price is determined on the basis of demand n supply ,which may not be real or normal.Example is

the price of onions.Because demand is more than supply,the price has sky rocketed n this high price is

market price.But the normal price is what would have been the reasonable price during this time of the

year.... say Rs.10 per kg. Answer:

Price is the value or worth of a product or service and when you say price then it vehicle the normal price of a product or a service which a company charges. On the other hand, market price is the price of a product or service which is contained by a marketplace and is resulted through market efficiency, equilibrium and normal expectations. Normal price can be lesser, equal or greater than the market price. If most of the companies in an industry charge open market prices for the products or services then competition is high in that specific industry.

Q3

In microeconomic theory, an indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. One can equivalently refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]

There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map

An example of an indifference map with three indifference curves represented

Q4

Oligopoly

Defining and measuring oligopoly

An oligopoly is a market structure in which a few firms dominate. When a market is shared between a

few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that

many small firms may also operate in the market. For example, major airlines like British Airways (BA) and

Air France operate their routes with only a few close competitors, but there are also many small airlines

catering for the holidaymaker or offering specialist services.

Definition of OLIGOPOLY: a market situation in which each of a few producers affects but does not control the market

Q5

What is Perfect Competition ? Meaning ↓

Perfect Competition is a market structure where there is a perfect degree of competition and single price prevails.

The concept of Perfect Competition was introduced by Dr. Alfred Marshall.

Image Credits © Welker's Wikinomics.

Nothing is 100% perfect in this world. So, this states that perfect competition is only a theoretical possibility and it

does not exist in reality.

Main Features of Perfect Competition ↓

The following are the characteristics or main features of perfect competition :-

1. Many Sellers

In this market, there are many sellers who form total of market supply. Individually, seller is a firm and

collectively, it is an industry. In perfect competition, price of commodity is decided by market forces of demand

and supply. i.e. by buyers and sellers collectively. Here, no individual seller is in a position to change the price by

controlling supply. Because individual seller's individual supply is a very small part of total supply. So, if that seller

alone raises the price, his product will become costlier than other and automatically, he will be out of market.

Hence, that seller has to accept the price which is decided by market forces of demand and supply. This ensures

single price in the market and in this way, seller becomes price taker and not price maker.

2. Many Buyers

Individual buyer cannot control the price by changing or controlling the demand. Because individual buyer's

individual demand is a very small part of total demand or market demand. Every buyer has to accept the price

decided by market forces of demand and supply. In this way, all buyers are price takers and not price makers.

This also ensures existence of single price in market.

3. Homogenous Product

In this case, all sellers produce homogeneous i.e. perfectly identical products. All products are perfectly same in

terms of size, shape, taste, colour, ingredients, quality, trade marks etc. This ensures the existence of single

price in the market.

4. Zero Advertisement Cost

Since all products are identical in features like quality, taste, design etc., there is no scope for product

differentiation. So advertisement cost is nil.

5. Free Entry and Exit

There are no restrictions on entry and exit of firms. This feature ensures existence of normal profit in perfect

competition. When profit is more, new firms enter the market and this leads to competition. Entry of new firms

competing with each other results into increase in supply and fall in price. So, this reduces profit from abnormal

to normal level.

When profit is low (below normal level), some firms may exit the market. This leads to fall in supply. So remaining

firms raise their prices and their profits go up. So again this ensures normal level of profit.

6. Perfect Knowledge

On the front of both, buyers and sellers, perfect knowledge regarding market and pricing conditions is expected.

So, no buyer will pay price higher than market price and no seller will charge lower price than market price.

7. Perfect Mobility of Factors

This feature is essential to keep supply at par with demand. If all factors are easily mobile (moveable) from one

line of production to another, then it becomes easy to adjust supply as per demand.

Whenever demand is more additional factors should be moved into industry to increase supply and vice versa. In

this way, with the help of stable demand and supply, we can maintain single price in the Market.

8. No Government Intervention

Since market has been controlled by the forces of demand and supply, there is no government intervention in the

form of taxes, subsidies, licensing policy, control over the supply of raw materials, etc.

9. No Transport Cost

It is assumed that buyers and sellers are close to market, so there is no transport cost. This ensures existence of

single price in market.

Answer:

The perfectly competitive market is an economic anomaly; it does not exist in real life, because of the unreal circumstances that need to occur in perfectly competitive industries. Perfectly competitive markets have so many competing firms, that one firm cannot change the overall market price of the good that the firm is selling. In a perfectly competitive market, there is perfect economic efficiency for each firm. Each firm's demand curves are perfectly elastic (vertical), although the industry's D curve is not. Another characteristic is that the firms MR curve is equivalent to product price is equivalent to the demand curve is equal to total revenue. These are not all of the characteristics of perfect competition, but these are the basic defining features of this market type.A picture of a perfect competitor's cost curves: http://ourtwocents.files.wordpress.com/2008/04/perfect-competition.png

Q6

GNP

DefinitionGross National Product. GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country. Basically, GNP measures the value of goods and services that the country's citizens produced regardless of their location. GNP is one measure of the economic condition of a country, under the assumption that a higher GNP leads to a higher quality of living, all other things being equal.

Definition: The Gross National Product (GNP) is the value of all the goods and services produced in an economy, plus the value of the goods and services imported, less the goods and services exported.

gross national product (GNP) -- The total market value of goods and services produced during a given period by labor and capital supplied by residents of a country, regardless of where the labor and capital are located. GNP differs from GDP primarily by including the capital income that residents earn from investments abroad and excluding the capital income that nonresidents earn from domestic investment.

another definition...

Gross National Product (GNP) -- the most comprehensive measure of a nation's total output of goods and services, consisting of the total retail market value of all items and services produced in a country during a specified period.

another definition...

Gross National Product -- A measure of the market value of all goods and services produced within the boundaries of a nation plus receipts from foreign business activities and investments beyond the national boundaries

Q7

Balanced budget multiplier holds that if government revenues and expenditure increase or decrease simultaneously and equally, then national income will also change in the same amount - which means that the balanced budget multiplier equals to 1.

The reason behind the equal amount of change in national income is the opposite effect of the equal changes in the government revenues and expenditures.

The balanced budget multiplier is important in understanding the way governments manage the economy.

Term balanced-budget multiplier Definition : The ratio of the change in aggregate output (GDP) to a change in government spending, which are matched by an equal change in taxes. This is termed a balanced-budget multiplier because the change in spending is matched by the change in taxes and thus the government's budget deficit or surplus is neither increased nor decreased. If the government had a balanced budget before the changes, then it has one after the changes

Q8

category in: Business Tags: Business cycles, causes of recessions, Real Business Cycle

Business cycles of an economy refers to the fluctuations in outputs and employment level of that economy.Almost all economists agree upon the fact that output remain at natural rate in the long run whereas there exists fluctuations in the short run that are not predictable.These random and irregular fluctuations in output from its natural rate are termed as business cycles.Business cycles are followed by contractions and expansions in economic activity and measured by changes in real GDP.

There exist a lot of questions regarding business cycles and thus different school of thoughts.The economists disagree upon that is why output deviate in the short run not in the long run, why the same resources yield different outputs, how some economies have more while others have less fluctuations in output and what factors work behind the booms and recessions.

There are many theories to explain the causes of business cycles the prominent of which are disequilibrium models(Keynesian) and equilibrium models(Monetarist), these models explain business cycles emphasizing on the factor demand for labor that there is lack of demand for workers and consider it the cause by stating that labor market do not clear in the short run and adjustments take time because wages and prices are sticky.If output goes down it is due to that market fails to clear pushing the economy into recession.

Business cycles,causes and effectsBy Business

category in: Business Tags: Business cycles, causes of recessions, Real Business Cycle

Business cycles of an economy refers to the fluctuations in outputs and employment level of that economy.Almost all economists agree upon the fact that output remain at natural rate in the long run whereas there exists fluctuations in the short run that are not predictable.These random and irregular fluctuations in output from its natural rate are termed as business cycles.Business cycles are followed by contractions and expansions in economic activity and measured by changes in real GDP.

Smart Business

There exist a lot of questions regarding business cycles and thus different school of thoughts.The economists disagree upon that is why output deviate in the short run not in the long run, why the same resources yield different outputs, how some economies have more while others have less fluctuations in output and what factors work behind the booms and recessions.

There are many theories to explain the causes of business cycles the prominent of which are disequilibrium models(Keynesian) and equilibrium models(Monetarist), these models explain business cycles emphasizing on the factor demand for labor that there is lack of demand for workers and consider it the cause by stating that labor market do not clear in the short run and

adjustments take time because wages and prices are sticky.If output goes down it is due to that market fails to clear pushing the economy into recession.

Strategic Business

An important explanation of business cycles is by Real Business Cycle Theory based on the classical assumptions.

Real Business Cycle Theory explains the fluctuations in output and employment through changes in labor supply opposed to Keynesian and Monetarist view that stress upon demand for labour.Important feature of this theory is consideration of the real factors.

Real Business Cycle Theory states that business cycles occurs as a result of productivity changes occurred by real factors.The theory emphasizes the changes in intertemporal substitution of labor and technology shocks and also consider that government should not make interventions through monetary and fiscal policies as economy automatically adjusts to these changes.If the economy does not adjusts to these changes it will be in recession.

According to this theory, labor supply depends on how workers response to the incentives.Fluctuations in technology directly affects the labor productivity i.e if technology improves labor productivity and real wages increases causing the output and employment to increase and if it regress the output and employment decreases accordingly.

The theory also consider the other real factors such as natural disasters and weather conditions that can affect output.Another important point is that output and money supply move together,money supply does not effect output.

There are found some flaws in real business cycle theory but inspite of its drawbacks it is an important contribution to the understanding of concept of business cycles.

Causes of Business Cycle

BY TEJVAN PETTINGER ON MARCH 31, 2010 IN ECONOMICS

Readers Question: How do business cycles impact the economy? What are the causes of

business cycles of expansion and contraction?

The business or trade cycle relates to the volatility of economic growth.

In the UK, the average rate of economic growth is about 2.5%; however, the actual growth

rate can vary. For example, the UK has experienced many economic booms and also

recessions.

For example, in the late 1980s, we experienced rapid economic growth of over 5% a year.

However, this growth proved unsustainable leading to inflation and then a recession in the

early 1990s.

Causes of Business Cycle

1. Changes in interest rate affect consumer spending and economic growth. See: Interest rate

cycle

2. Changes in house prices. A rise in house prices creates a wealth effect and higher

consumer spending. A fall in house prices causes lower consumer spending and bank

losses. (house prices and consumer spending)

3. Consumer and Business confidence. People are easily influenced by external events. If

there is a succession of bad economic news, this tends to discourage people from spending

and investing making a small downturn into a bigger recession. But, when the economy

recovers this can cause a positive bandwagon effect.

Causes of Recessions

See: causes of recessions

The cause of the US recession in 2008 will be:

Falling house prices causing negative wealth effect and lower consumer spending

Credit crunch causing an increase in cost of borrowing and shortage of funds

Volatile stock markets and money markets undermining  business and investment

confidence.

See also: Economic booms

Impact of Business Cycle on Economy

A volatile business cycle is considered bad for the economy. A period of economic boom

(rapid growth in economy) invariably leads to inflation with various economic costs. This

inflationary growth tends to be unsustainable and leads to a bust (recession). See: Lawson

Boom and Bust

The biggest problem of the business cycle is that recession represent a large wastage of

resources. A prolonged period of unemployment can also lead to a loss of labour productivity

as workers get discouraged and leave the labour market.

Monetary authorities tend to try and minimise  fluctuations in the business cycle. They seek

to avoid inflation and avoid a recession. In the UK, the main tool to smooth the business

cycle is the use of interest rates.

Some economists argue that the business cycle is an essential part of an economy. Even

downturns have their role to play as it tends to ‘shakeup’ the economy and weed out

‘inefficient’ firms and creating greater incentives to cut costs and be efficient. However, this

view is controversial and other economists argue that in a recession, even ‘good efficient’

firms can go out of business leading to a permanent loss of productive capacity.

Q 9

Definition: Stagflation is when the economy experiences slow GDP growth (stagnation) with high inflation. This occurred in the 1970's, when there were six quarters of negative GDP growth. (Source: BEA, Chart of 1970-1979 GDP).

Inflation tripled in 1973, rising from 3.4% to 9.6%. It remained between 10-12% from February 1974 through April 1975. (Source: BLS, Chart of 1970-1979 Inflation)

When the economy is working normally, stagnant economic growth reduces demand, which keeps prices low, preventing inflation. Stagflation can only occur when fiscal or monetary policy sustains high prices, and inflation, despite slow growth.

Stagflation is normally blamed on the oil supply shocks of 1973, when OPEC cut its quota and prices quadrupled. However, several other shocks occurred:

The U.S. went off the gold standard (Bretton Woods Agreement), which increased the money supply. This created inflation, as too many dollars chased too few goods.

As prices rose, demand fell, and businesses cut back on production.

However, the effect of the sudden surplus of dollars kept an upward pressure on prices even after the economy became sluggish. Ultimately, inflation rose to double digits.

President Nixon instituted wage and price controls, throwing off the ability of the markets to self-correct.

To fight inflation, the Fed kept raising the Fed Funds rate, reaching a peak of 20% in 1979. However, it did so in a "stop-go" fashion, confusing price-setters, many of whom kept prices high.

Source: (A Monetary Explanation of the Great Stagflation of the 1970s, Robert B. Barsky, University of Michigan and NBER; Lutz Kilian, University of Michigan and CEPR, 2000)

Can stagflation reoccur? Yes, in response to sudden increases in global liquidity, but probably not to the same extent. That's because both stop-go monetary policies and wage-price controls have been discarded.

Definition:

Stagflation refers to an economy that is experiencing no (or negative) growth, as well as inflation. Thus, stagflation typically means that people's employment situations are not improving, but their overall cost of living is still increasing.

The last prolonged period of stagflation in the United States occurred in the 1970's, when the overall economy was struggling, but inflation (driven by oil and energy prices) continued to rise.

For parents attempting to save or pay for college, a cost which is already subject to an above average rate of annual prices increases, stagflation adds insult to injury. In such an environment, many parents will find their ability to save or pay for college limited dramatically, while the actual costs of a college education rise faster than ever.

Section 529 prepaid tuition plans and I-Bonds are likely to be a favorite of many parents suffering under stagflation, since these programs guarantee that their savings grow at least as fast as inflation

High inflation and high unemployment (stagnation) occurring simultaneously.

Definition of 'Stagflation'A condition of slow economic growth and relatively high unemployment - a time of stagnation -

accompanied by a rise in prices, or inflation.

Investopedia explains 'Stagflation'Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.

Q10

There are myriad ways to control the trade cycle; however, it must be said that the trade cycle also has a life of its own, and it may not respond to typical changes designed to "help it along". For example, government stimulus packages that are handed out to large banks may

keep banks afloat, but they may not necessarily help the common people (who are actually the bank's customers).

Band aid solutions

Therefore, band-aid solutions that offer temporary fixes may not be enough to create jobs, hold back recessions, or spur spending in tough economic times. Other typical measures used to control the trade cycle include taxation laws (import/export, laws small and large business laws, etc.). `Every country has their own tax laws, and these may be used to make doing business in a country more appealing. In other words, if the government makes it cheap for corporations to set up factories and so on, corporations will be more inclined to set up shop, and this will create jobs. However, giving too many breaks to big business is a problem, too, as it makes the middle and lower classes quite angry.

Tax laws can spur investment

In a perfect world, taxation would be based on income and assets; however, in the real world of sustaining the trade cycle at all costs, the very rich often catch a break. The middle class tend to bear the brunt of the tax burden, since they don't have access to the tax loopholes of the very rich, and they don't access social services as much as the poorest citizens. There will always be a link between taxation laws and the trade cycle.

The trade cycle can be severely injured and disrupted by stock market crashes, so economists try to predict these downward spirals far in advance. In fact, there is usually warning that these crises are looming, even if analysts can't say exactly when they take place.

Answer:

Improve

1. Fiscal Measures: During the period of boom, decrease in public expenditures, increase in taxes and increase in public debt. On the other hand, during the period of depression, the policy of increase in public expenditures, decrease in taxes and decrease in public debt is adopted by the government.

2. Monetary Measures: Monetary measures mean that control of money and credit supply in the country. When we are facing boom or inflation, the central bank

reduces the total quantity of money in circulation. The bank can adopt different measures like bank rate policy, open market operations and rationing of credit etc. On the other hand, incase of depression, the central bank can increase the quantity of money by lowering the bank rate or purchasing the securities and discounted the bills of exchange.

3. International measures: Today every country has trade relation with other countries. If

there is inflation or deflation in one country, it can be easily be carried top other countries, the example of great depression can be given. Business cycle is an international phenomena and it should be tackled on international level. Different measures have been suggested by the economists to control the business fluctuations effectively. Such as: (a). Control of international production. (b). International bill stock control and international investment control.

4. State control of private investment: If the govt. controls the private investment, cyclical fluctuations can be controlled within limits while the other economists who this agree with the above view, they say that private investment will be discouraged. But J.M. Keynes says that if we adopt the middle way we can control the fluctuations.

Part B

Q1

Answer:

Improve

According to the classical economists there is full employment in the economy, every job seeker gets the job in accordance with his capabilities and there is never involuntary unemployment. Moreover, the resources of the economy are fully employed. The classical economists believed in Lassies fair economy, there should be no government intervention in the economic affairs.

In other world, the classical believed in the free enterprise economy. It is told that the classical economists never presented their model in a refined form. However, the credit goes to modern economists who integrated classical form. However, the credit goes to modern economists who integrated classical ideas. The classical model has two pillars. They are Says law of market and quantity theory of money. The say's law is concerned with the real sector or production sector of the economy. While quantity theory is linked with the classical views regarding labor market and credit are also presented. All such means the classical model is explained with the help of four markets of the economy: Goods market, credit market, labor market and money market. A closed private economy where there is no foreign trade and no government, Short run model where population, capital, technology and organizational knowledge remain the same.

Q2

Answer:

Improve

Multilplier is the ratio by which a given increase in investment brings about an increase in the national income. The extent of the increase in income ranges from 1 to infinity depending on the mariginal propensity to consume (MPC) and marginal propensity to save (MPS). Multiplier is symbolised by the aphabet "K" and its value is calculated as under:

1 1K = ------------------------- = -----------------------1-MPC MPSIf MPC =1, K = infinity and if MPC = 0, K = 1 and in between there are numerous ratios, depending on the data in a question.Multiplier can also be defined as the reciprocal of marginal propensity to save because K = 1/MPS

Read more: http://wiki.answers.com/Q/What_is_multiplier_and_explain_the_working_of_it#ixzz1kkbiSgGe

Q3

A

Definition of 'Price Discrimination'A pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. In more common forms of price discrimination, the seller places customers in groups

based on certain attributes and charges each group a different price.

Investopedia explains 'Price Discrimination'Price discrimination allows a company to earn higher profits than standard pricing because it allows firms to capture every last dollar of revenue available from each of its customers. While perfect price discrimination is illegal, when the optimal price is set for every customer, imperfect price discrimination exists. For example, movie theaters usually charge three different prices for a show. The prices target various age groups, including youth, adults and seniors. The prices fluctuate with the expected income of each age bracket, with the highest charge going to the adult population.

Read more: http://www.investopedia.com/terms/p/price_discrimination.asp#ixzz1kkcTpiUP

Price Discrimination  Most businesses charge different prices to different groups of consumers for what is more or less the same good or service! This is price discrimination and it has become widespread in nearly every market. This note looks at variations of price discrimination and evaluates who gains and who loses?

What is price discrimination?

Price discrimination or yield management occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs.

It is important to stress that charging different prices for similar goods is not pure price discrimination.

We must be careful to distinguish between price discrimination and product

differentiation – differentiation of the product gives the supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality / performance of a good or service.

Conditions necessary for price discrimination to work

Essentially there are two main conditions required for discriminatory pricing

o Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase its total revenue and profits (i.e. achieve a higher level of producer surplus). To profit maximise, the firm will seek to set marginal revenue = to marginal cost in each separate (segmented) market.

o Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent “market seepage” or “consumer switching” – defined as a process whereby consumers who have purchased a good or service at a lower price are able to re-sell it to those consumers who would have normally paid the expensive price. This can be done in a number of ways, – and is probably easier to achieve with the provision of a unique service such as a haircut rather than with the exchange of tangible goods. Seepage might be prevented by selling a product to consumers at unique and different points in time – for example with the use of time specific airline tickets that cannot be resold under any circumstances.

Examples of price discrimination

Price discrimination is an extremely common type of pricing strategy operated by virtually every business with some discretionary pricing power. It is a classic part of price competition between firms seeking a market advantage or to protect an established market position.

(a) Perfect Price Discrimination – charging whatever the market will bearSometimes known as optimal pricing, with perfect price discrimination, the firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay. If successful, the firm can extract all consumer surplus that lies beneath the demand curve and turn it into extra producer revenue (or producer surplus). This is impossible to achieve unless the firm knows every consumer’s preferences and, as a result, is unlikely to occur in the real world. The transactions costs involved in finding out through market research what each buyer is prepared to pay is the main block or barrier to a businesses engaging in this form of price discrimination.

If the monopolist is able to perfectly segment the market, then the average revenue curve effectively becomes the marginal revenue curve for the firm. The monopolist will continue to see extra units as long as the extra revenue exceeds the marginal cost of production.

The reality is that, although optimal pricing can and does take place in the real world, most suppliers and consumers prefer to work with price lists and price menus from which trade can take place rather than having to negotiate a price for each unit of a product bought and sold.

Second Degree Price Discrimination

This type of price discrimination involves businesses selling off packages of a product deemed to be surplus capacity at lower prices than the previously published/advertised price.

Examples of this can often be found in the hotel and airline industries where spare rooms and seats are sold on a last minute standby basis. In these types of industry, the fixed costs of production are high. At the same time the marginal or variable costs are small and predictable. If there are unsold airline tickets or hotel rooms, it is often in the businesses best interest to offload any spare capacity at a discount prices, always providing that the cheaper price that adds to revenue at least covers the marginal cost of each unit.

There is nearly always some supplementary profit to be made from this strategy. And, it can also be an effective way of securing additional market share within an oligopoly as the main suppliers’ battle for market dominance. Firms may be quite happy to accept a smaller profit margin if it means that they manage to steal an advantage on their rival firms.

The expansion of e-commerce by both well established businesses and new entrants to online retailing has seen a further growth in second degree price discrimination.

Early-bird discounts – extra cash-flow

The low cost airlines follow a different pricing strategy to the one outlined above. Customers booking early with carriers such as EasyJet will normally find lower prices if they are prepared to commit themselves to a flight by booking early. This gives the airline the advantage of knowing how full their flights are likely to be and a source of cash-flow in the weeks and months prior to the service being provided. Closer to the date and time of the scheduled service, the price rises, on the simple justification that consumer’s demand for a flight becomes more inelastic the nearer to the time of the service. People who book late often regard travel to their intended destination as a necessity and they are therefore likely to be willing and able to pay a much higher price very close to departure.

Airlines call this price discrimination yield management – but despite the fancy name, at the heart of this pricing strategy is the simple but important concept – price elasticity of demand!

The airlines have become masters at price discrimination as a means of maximising

revenue from passengers travelling on the flight networks. Other transport businesses do the same!

Peak and Off-Peak Pricing

Peak and off-peak pricing and is common in the telecommunications industry, leisure retailing and in the travel sector. Telephone and electricity companies separate markets by time: There are three rates for telephone calls: a daytime peak rate, and an off peak evening rate and a cheaper weekend rate. Electricity suppliers also offer cheaper off-peak electricity during the night.

At off-peak times, there is plenty of spare capacity and marginal costs of production are low (the supply curve is elastic) whereas at peak times when demand is high, we expect that short run supply becomes relatively inelastic as the supplier reaches capacity constraints. A combination of higher demand and rising costs forces up the profit maximising price.

Third Degree (Multi-Market) Price Discrimination

This is the most frequently found form of price discrimination and involves charging different prices for the same product in different segments of the market. The key is that third degree discrimination is linked directly to consumers’ willingness and ability to pay for a good or service. It means that the prices charged may bear little or no relation to the cost of production.

The market is usually separated in two ways: by time or by geography. For example, exporters may charge a higher price in overseas markets if demand is estimated to be more inelastic than it is in home markets.

MC=AC

�

Suppose that a firm has separated a market by time into a peak market with inelastic demand, and an off-peak market with elastic demand. The demand and marginal revenue curves for the peak market and off peak markets are labelled A and B respectively. This is illustrated in the diagram above. Assuming a constant marginal cost for supplying to each group of consumers, the firm aims to charge a profit maximising price to each group.

In the peak market the firm will produce where MRa = MC and charge price Pa, and in the off-peak market the firm will produce where MRb = MC and charge price Pb. Consumers with an inelastic demand for the product will pay a higher price (Pa) than those with an elastic demand who will be charged Pb.

The internet and price discrimination

A number of recent research papers have argued that the rapid expansion of e-commerce using the internet is giving manufacturers unprecedented opportunities to experiment with different forms of price discrimination. Consumers on the net often provide suppliers with a huge amount of information about themselves and their buying habits that then give sellers scope for discriminatory pricing. For example Dell Computer charges different prices for the same computer on its web pages, depending on whether the buyer is a state or local government, or a small business.

Two Part Pricing Tariffs

Another pricing policy common to industries with pricing power is to set a two-part tariff for consumers. A fixed fee is charged (often with the justification of it contributing to the fixed costs of supply) and then a supplementary “variable” charge based on the number of units consumed. There are plenty of examples of this including taxi fares, amusement park entrance charges and the fixed charges set by the utilities (gas, water and electricity). Price discrimination can come from varying the fixed charge to different segments of the market and in varying the charges on marginal units consumed (e.g. discrimination by time).

Peak time pricing – a common feature of many local transport markets

Product-line pricing

Product line pricing is also becoming an increasingly common feature of many markets, particularly manufactured products where there are many closely connected complementary products that consumers may be enticed to buy. It is frequently observed that a producer may manufacture many related products. They may choose to charge one low price for the core product (accepting a lower mark-up or profit on cost) as a means of attracting customers to the components / accessories that have a much higher mark-up or profit margin.

Manufacturers charge low prices for the razors but high prices for the razor blades – a good example of product line pricing

Good examples include manufacturers of cars, cameras, razors and games consoles. Indeed discriminatory pricing techniques may take the form of offering the core product as a “loss-leader” (i.e. priced below average cost) to induce consumers to then buy the complementary products once they have been “captured”. Consider the cost of computer games consoles or Mach3 Razors contrasted with the prices of the games software and the replacement blades!

The Consequences of Price Discrimination - Welfare and Efficiency Arguments

To what extent does price discrimination help to achieve a more efficient allocation of resources? There are arguments on both sides of the coin – indeed the impact of price discrimination on welfare seems bound to be ambiguous.

The impact on consumer welfare

Consumer surplus is reduced in most cases - representing a loss of consumer welfare. For the majority of consumers, the price charged is significantly above marginal cost of production. Those consumers in segments of the market where demand is inelastic would probably prefer a return to uniform pricing by firms with monopoly power! Their welfare is reduced and monopoly pricing power is being exploited.

However some consumers who can buy the product at a lower price may benefit. Previously they may have been excluded from consuming it. Low-income consumers may be “priced into the market” if the supplier is willing and able to charge them a lower price. Good examples to use here might include legal and medical services where charges are dependent on income levels. Greater access to these services may yield external benefits (positive externalities) which then have implications for the overall level of social welfare and the equity with which scarce resources are allocated.

Producer surplus and the use of profit

Price discrimination is clearly in the interests of businesses who achieve higher profits. A discriminating monopoly is extracting consumer surplus and turning it into extra supernormal profit. Of course businesses may not be driven solely by the aim of maximising profit. A company will maximise its revenues if it can extract from each customer the maximum amount that person is willing to pay.

Price discrimination also might be used as a predatory pricing tactic – i.e. setting prices below cost to certain customers in order to harm competition at the supplier’s level and thereby increase a firm’s market power. This type of anti-competitive practice is difficult to prove, but would certainly come under the scrutiny of the UK and European Union competition authorities.

A converse argument to this is that price discrimination may be a way of making a market more contestable in the long run. The low cost airlines have been hugely successful partly on the back of extensive use of price discrimination among consumers.

The profits made in one market may allow firms to cross-subsidise loss-making activities/services that have important social benefits. For example profits made on commuter rail or bus services may allow transport companies to support loss making rural or night-time services. Without the ability to price discriminate these services may have to be with drawn and employment might suffer. In many cases, aggressive price discrimination is seen as inimical to business survival during a recession or sudden market downturn.

An increase in total output resulting from selling extra units at a lower price might help a monopoly supplier to exploit economies of scale thereby reducing long run average costs.

Price discrimination or price differentiation[1] exists when sales of identical goods or services are transacted at different prices from the same provider.[2] In a theoretical market with perfect information, perfect substitutes, and no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopolistic and oligopolistic markets,[3] where market power can be exercised. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, product heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing unsustainable in the long run) can allow for some degree of differential pricing to different consumers, even in fully competitive retail or industrial markets. Price discrimination also occurs when the same price is charged to customers which have different supply costs.

The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can reduce efficiency by misallocating output among consumers.

Price discrimination requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This usually entails using one or more means of preventing any resale, keeping the different price groups separate, making price comparisons difficult, or restricting pricing information. The boundary set up by the marketer to keep segments separate are referred to as a rate fence. Price discrimination is thus very common in services where resale is not possible; an example is student discounts at museums. Price discrimination in intellectual property is also enforced by law and by technology. In the market for DVDs, DVD players are designed - by law - with chips to prevent an inexpensive copy of the DVD (for example legally purchased in India) from being used in a higher price market (like the US). The Digital Millennium Copyright Act has provisions to outlaw circumventing of such devices to protect the enhanced monopoly profits that copyright holders can obtain from price discrimination against higher price market segments.

Price discrimination can also be seen where the requirement that goods be identical is relaxed. For example, so-called "premium products" (including relatively simple products, such as cappuccino compared to regular coffee) have a price differential that is not explained by the cost of production. Some economists have argued that this is a form of price discrimination exercised by providing a means for consumers to reveal their willingness to pay.

Q3

B

Definition of 'Product Differentiation'A marketing process that showcases the differences between products. Differentiation looks to make a product more attractive by contrasting its unique qualities with other competing

products. Successful product differentiation creates a competitive advantage for the seller, as

customers view these products as unique or superior.

Investopedia explains 'Product Differentiation'Product differentiation can be achieved in many ways. It may be as simple as packaging the goods in a creative way, or as elaborate as incorporating new functional features. Sometimes differentiation does not involve changing the product at all, but creating a new advertising campaign or other sales promotions instead.

In economics and marketing, product differentiation (also known simply as "differentiation") is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own product offerings. The concept was proposed by Edward Chamberlin in his 1933 Theory of Monopolistic Competition.

Contents [hide]

1 Rationale 2 Ethical concerns 3 See also 4 References 5 External links

[edit] Rationale

Differentiation can be a source of competitive advantage. Although research in a niche market may result in changing a product in order to improve differentiation, the changes themselves are not differentiation. Marketing or product differentiation is the process of describing the differences between products or services, or the resulting list of differences. This is done in order to demonstrate the unique aspects of a firm's product and create a sense of value. Marketing textbooks are firm on the point that any differentiation must be valued by buyers (e.g.[1]). The term unique selling proposition refers to advertising to communicate a product's differentiation.[2]

In economics, successful product differentiation leads to monopolistic competition and is inconsistent with the conditions for perfect competition, which include the requirement that the products of competing firms should be perfect substitutes. There are three types of product differentiation: 1. Simple: based on a variety of characteristics 2. Horizontal : based on a single characteristic but consumers are not clear on quality 3. Vertical : based on a single characteristic and consumers are clear on its quality [3]

The brand differences are usually minor; they can be merely a difference in packaging or an advertising theme. The physical product need not change, but it could. Differentiation is due

to buyers perceiving a difference, hence causes of differentiation may be functional aspects of the product or service, how it is distributed and marketed, or who buys it. The major sources of product differentiation are as follows.

Differences in quality which are usually accompanied by differences in price Differences in functional features or design Ignorance of buyers regarding the essential characteristics and qualities of goods they are

purchasing Sales promotion activities of sellers and, in particular, advertising Differences in availability (e.g. timing and location).

The objective of differentiation is to develop a position that potential customers see as unique. The term is used frequently when dealing with freemium business models, in which businesses market a free and paid version of a given product. Given they target a same group of customers, it is imperative that free and paid versions be effectively differentiated.

Differentiation primarily impacts performance through reducing directness of competition: As the product becomes more different, categorization becomes more difficult and hence draws fewer comparisons with its competition. A successful product differentiation strategy will move your product from competing based primarily on price to competing on non-price factors (such as product characteristics, distribution strategy, or promotional variables).

Most people would say that the implication of differentiation is the possibility of charging a price premium; however, this is a gross simplification. If customers value the firm's offer, they will be less sensitive to aspects of competing offers; price may not be one of these aspects. Differentiation makes customers in a given segment have a lower sensitivity to other features (non-price) of the product.[4]

Q4

Definition: Ups and downs in the economic activity is called as trade cycle

Causes o f trade cycle

Following are the causes of trade cycle

1-High population

2- High demand

3-Unemployment

4-War

5- Natural calamities

6-trade union

7-low saving

8-invstment

9-expansion of credit

10-high interest rates

Read more: http://wiki.answers.com/Q/What_is_trade_cycle_and_explain_its_causes#ixzz1kkekyUH8

Q5

Q1.      Critically discuss different methods of Demand Forecasting?

Ans-    Demand Forecasting:-

The activity of estimating the quantity of a product or service that consumers will

purchase. Demand forecasting involves techniques including both informal methods,

such as educated guesses, and quantitative methods, such as the use of historical sales

data or current data from test markets. Demand forecasting may be used in making

pricing decisions, in assessing future capacity requirements, or in making decisions on

whether to enter a new market.

(A) Survey Methods:-

Survey methods are generally used where purpose ultimate short run forecast of

demand. Under these methods servings are conducted to correct information about

consumer intentions and their future purchase planes further survey and end use

method. In complete enumeration methods these are some limitations- (i) It can be

successfully used in case of their products whose consumers are concentrated in certain

region or locality (ii) This method can’t be used in wide spread markets sample survey 

method has also disadvantages such (i) sometime, reliability of data is missing. (ii) It can

be of greater use in forecasting where quantifications of variables is not possible and

behaviour is subject to change.

In opinion polls methods, there are three methods more

(a) Expert opinion methods:-

Expert opinion method is simple and inexpensive but has some limitations (i) estimates

provided by sales representatives are reliable only to extent of cheers skill to analyze the

market (ii) Demand estimates may more the subjective judgment of the assessor which

may lead to over or under estimation (iii) The assessment of market demand based on

inadequate information available to sales representations.

(b) Delphos method:-

This technique is an extension of simple expert opinion pole method there experts may

revise estimates of forecast of other experts along with other assumptions. Here, the

unconstructed opinions of the experts may conceal the fact that information used by

experts in expressing their forecasts may be based on sophisticated techniques.

(c)        Market Studies and Experiments:-

Here, firms select some areas of the representative markets having similar features

population income levels etc. Then market experiments are carriedout. But this method

had few disadvantages (i) Experimental methods are very expensive and cannot be

carried by small firms (ii) These methods are based on short term and controlled

conditions markets and results may not be applicable (iii) Tinkering with price increases

may cause a permanent loss of customers to competitive brands that might have been

tried.

(B)       Statistical Methods:-

Statistical methods are considered to be superior techniques of estimation of demand

due to reasons as (i) method of estimation is scientific (ii) estimates are relatively reliable

(iii) the element of subjectivity is minimum (iv) estimation involves smaller costs

statistical methods of demand projection include the following techniques

Trend Projection methods

It is classical method of forecasting which is concerned with the study of movements of

variables through time or cause and effect relationship is not revealed by this method,

the projections made on trend basis are considered by many as mechanical approach

trend method can be projected by three techniques based on time series data- Graphical

method, lease square method and box tanking method. Exponential trend is technique

used in Graphical method. It is represented as

Y = a + bT + cT2

Where a, b, c are constants, T is time and C = 2.718. But trend method can be criticized

on the basis of its limitations (i) It is assumed that past rate of change in dependent

variable will persist in future also therefore, the forecast based on this assumption may

be considered to be reliable only for the period during which this assumption holds (ii)

This method can’t be used for short term estimates and also where trend is cyclical with

sharp turning points of through and peaks (iii) This method does not bring out the

measure of relationship between dependents and independent variable.

 Barometric method of forecasting

This method follows the method meteorologist use in weather forecasting. Many

economists use economic in dictators as barometer of forecast trends in business

activities. In this method, problem of choice may arise because some of the indicators

appear in more than one indicators. It is not advisable to rely on just one of the

indicators. But this method can be used for a short term forecasting. A leading indicator

of variable to be forecast is not always easily available.

Economic method

The method combine statistical tools with economic theories to estimate economic

variables and to forecast economic events the economic methods have basically two

techniques.

Regression method

In regression technique of demand forecasting the analyst estimate the demand function

for a product. This method can be simple regression with one independent variable and

multi-variable demand function with more than one independent variables. Here,

reliability of variables rely on many factors these methods can also be tested.

(ii)        Simultaneous equation model

It is a complete and systematic approach to forecasting this technique uses sophisticated

mathematical and statistical tools which are beyond other methods ‘usually’ every

statistical method is very complex in nature. They are very difficult to be understood and

a lay mean can never understand its calculation as they need numerical analysis. The

methods also need adequate data as well as variables also for proper forecasting.

Q2. The total cost function of a form has been estimated as

             TC= 100+10Q + 200Q2

            Where Q= Quantity produced find

Managerial cost when QW=10

Quantity (Q) at which average cost id minimum

Q at which average cost equals marginal cost

Ans. We have been given Total Cost functions as:-

TC = 100+10Q+20Q2

(a) Marginal cost when given as Q = 10

Marginal cost is technically the first derivative of TC function. That is

We have to find the derivative of 100+10Q+20Q2, we get

= 10+ 40Q         ………… (a)

Equation (a) is representing the behaviour of marginal cost, that is MC. Here Q= 10 By

Putting value of Q in (a), we get

= 10 + 40 x 10

= 10 + 400

= 410

Therefore when Q is 10 then marginal cost is 410.

(b) Quantity where average cost is minimum

The average cost is defined as

The critical value of Q in respect of Average Cost at which AC is minimum. This will be

obtained by differentiation the equation when

= = 0

We have to set the equation equal to zero. The critical value of Q in respect of AC is

given by

+ 10 + 40Q = 0

The equation takes the form as of quadratic equation-

–100 + 10Q + 40Q2  = 0

Or        40Q2 + 10Q – 100 = 0          …………(i)

We have to factorize the equation (i), we get Q as:-

Q=10

Q at which average cost equals marginal cost at the level of optimum output average

cost is minimum and constant. At this point marginal cost becomes equal to the average

cost. The marginal cost curves cut the average cost curve at its minimum from (b) we

know that Q is 10 at its minimum. Therefore, here its is methods increasing nor

decreasing, it will be called constant. Therefore at Q= 10, then the AC= MC because we

know, when Average cost is constant AC=MC

Note we can also derive the values by forming the table and using the formulas of

average cost and total cost as well as the marginal cost.